Consideration of the sinking fund method as a basis for amortizing franchises;

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90 HASKINS & SELLS December
Consideration of the Sinking Fund Method as a Basis for
Amortizing Franchises
By JOHN RAYMOND WILDMAN.
(A Paper Read before a Regional Meeting of the American Institute of Accountants,
at Cincinnati, Ohio, November 11, 1922.)
ACCOUNTANTS have been accused
by laymen, on more than one occa­sion,
of making things which are simple
and clear appear complex and mysterious.
Whether the sinking fund method as a
basis for amortizing franchises may not be
so stigmatized, is one of the questions to
which, in this paper, I desire to give con­sideration.
Some of the other matters
have to do with the comparative applica­tion
to a practical case of this and the
straight line method.
Definitions, always difficult to frame and
sometimes equally difficult to understand,
are a necessary antecedent to any technical
discussion. I shall therefore take the
liberty, in order to avoid any misunder­standing,
of stating my conception of cer­tain
terms.
A sinking fund is an asset, withdrawn
and set apart from general funds, which,
through periodical deposits with interest
accretions, will accumulate at a future
given date to a sum sufficient to liquidate
a certain liability.
Amortization, as it relates to a fran­chise,
is that process whereby the value
of the franchise is periodically and gradu­ally
reduced.
A franchise is a governmental grant,
giving the exclusive right to make use of
natural resources, or of public property,
either for a term or in perpetuity.
It appears that we are not concerned in
this discussion with the manner in which
the franchise value is derived, but rather
with subsequent treatment of the value
after is has once been fixed. It appears,
further, that complications will be avoided
and the issue made clearer if franchises
granted in perpetuity are eliminated. We
then have before us only such franchises
as are granted to run for a term of years
and may not be renewed.
It will be conceded, presumably, that
term franchises without renewal features
will, at their expiration, have no value as
assets, and that proper accounting re­quires
that the value of any such franchise
shall be absorbed through charges to
operations extending over the period which
the franchise has to run. There is every
logical reason for making the charges to
operations uniform, and no logical reason,
apparently, for varying the charges. And
this statement is based on the theory that
the asset is subject to gradual reduction
incident to lapse of time. Equity to
stockholders seems to demand that this
should be so.
The argument has sometimes been ad­vanced
that earnings are dependent on the
franchise; that as the franchise approaches
the end of its life the earnings decline in
amount. This is a possibility but is by no
means assured; while the expiration of the
franchise value is a certainty.
The question of replacing capital in­vested
in the franchise is one separate and
distinct from that at issue in this discus­sion,
and should not be confused there­with.
If it is desired to provide for the
replacement of the franchise so that, at
its expiration, the capital of stockholders
will have been kept intact, the creation of
a sinking fund is obviously necessary. The
distinction between a sinking fund for the
replacement of capital and the sinking